Some firms, predominantly in the hospitality and retail trade, warned that they would likely never open their doors again.

However, so far, in the course of the pandemic, the level of business failure has remained remarkably low.

According to figures from Deloitte, which covers the period up to the end of September, the total number of corporate insolvencies in the first nine months of the year was 431 – a reduction, albeit very marginal – on the 439 recorded in the same period last year.

“State-backed initiatives to support struggling companies affected by the Covid crisis, as well as creditor forbearance, including forbearance from the banking sector, have played a major part in preventing an early surge in corporate insolvencies,” David Van Dessel, a financial advisory partner at Deloitte explained.

Indeed, the loan payment breaks – offered by all the main banks from the start of the pandemic – have provided a lifeline to mortgage holders and businesses in what’s been a time of crisis for many.

Central Bank Deputy Governor Ed Sibley said last week that around 11,000, or a fifth of all, SME (small and medium enterprise) loans were on pandemic payment breaks as of early October – just days after the banks stopped formally providing the facility to new applicants and vowed to deal with companies on a ‘case by case’ basis.

Mr Sibley said continued supports would likely be needed by firms in the year ahead and he warned that many would continue to experience problems in the near term.

“Even when all supports are factored in, around one-in-six [SMEs] is likely to be financially distressed into 2021 as a result of the effects of the pandemic,” the Deputy Governor said.

That’s a lot of businesses that could be at risk of falling into difficulty in the year ahead and some of them may not make it through.

Artificial environment

Neil McDonnell, chief executive of the small and medium enterprise representative group, ISME, described the current trading environment as ‘artificial’, when all of the supports and forbearance measures are taken into account.

“If those supports weren’t there, you’d be seeing a significant number of insolvencies. And we know the supports can’t go on indefinitely. Don’t judge the viability of SMEs using the insolvency figures,” he cautioned.

Neil Hughes, Managing Partner with Baker Tilly, who specialises in examinerships, said normal restructuring activity had in effect been suspended because of the supports that were in place.

He says it will likely be well into next year before insolvencies emerge in larger numbers, a situation which he says would largely be in keeping with experience from previous downturns.

“Businesses typically have some reserves that they will burn through in a period of crisis and they will burn through favours in that period. That can take one to two years after the initial recession. Then the business runs out of cash and it runs out of road.”

He points to the last downturn and cites the unemployment rate hitting a peak in early 2012, some three to four years after the initial economic hit.

“It could be similar here. It could be late 2021 or into 2022 before it gets really tough for businesses and they start to run out of road.”

The evidence so far

According to Deloitte’s figures, it was the services sector that topped the list of insolvencies in the first nine months with 154 appointments, or just over a third of the total.

Next came retail, where 88 companies entered an insolvency process, followed by the hospitality sector, which recorded the third highest level with 70 incidences.

Of the 70, companies operating in the food services sector accounted for half of the insolvencies.

“Interestingly, there has only been a marginal increase in insolvency activity for the hospitality sector when compared to the same period in 2019,” David Van Dessel said.

“That would suggest the ‘fall out’ anticipated in that sector, arising from the financial impact of the various lockdowns, has yet to materialise.”

However, the retail sector has seen a 40% increase in activity so far in 2020, which Mr Van Dessel said might suggest that the sector was in a more vulnerable position when it was hit with the initial lockdown.

Neil McDonnell believes that vulnerability has spread to a wider cohort of firms at this point.

“Really, it’s any business that has been forced to fully shut down for level 5,” the ISME chief executive said.

He’s expecting significant growth in the numbers seeking restructuring, particularly in the hospitality sector as well as some retail and services businesses, such as hairdressers and travel agents.

He anticipates that the first signs of movement will come from the property sector and landlords that can no longer afford to exercise a degree of forbearance.

“We’ve seen it already. You have a lot of commercial landlords for whom the rent is meeting a bank covenant. If they can’t collect that rent, then someone is going to take a hit on the balance sheet.

“Landlords are probably going to be the first to sniff out where the insolvencies will start,” he said.

The processes

The vast majority of insolvencies in the first nine months – about three quarters of the total – were accounted for by a voluntary process known as Creditors’ Voluntary Liquidation.

Corporate receiverships have experienced a steady decline in recent years and that trend continued in the first three quarters of this year with 52 companies entering the process, down from 84 in the same period last year, according to Deloitte.

However, the third quarter of this year – July to September – saw a doubling of receiverships, to 25, compared to 12 in the same three-month period of last year.

“There is no indication that this recent increase in debt recovery activity is a result of defaults associated with the impact of the pandemic itself. It is more likely to be a resolution of a backlog of “pre-lockdown cases”, which would have arisen due to a general moratorium on enforcement during the second quarter of 2020,” David Van Dessel explained.

A receivership is the end of the road for a business and most will seek to avoid it by opting for an informal process with creditors initially before moving onto an examinership.

“Tens of thousands of businesses have already engaged in informal restructuring in recent months,” Neil Hughes explains.

“Most businesses will try to deal with their problems informally. No business goes into examinership unless they have to. It’s not automatically for the asking for a business that just wants to rearrange its affairs. It’s for businesses that need it.”

The examinership process is administered through the courts, with SMEs being dealt with predominantly through the Circuit Court, while larger corporates typically go to the High Court.

The process offers struggling businesses protection for up to 150 days during which it can restructure and rebuild, as well as putting a scheme in place with creditors to enable the company to emerge at the far end.

“The success rate is high,” Mr Hughes said.

“The vast majority of businesses that go through it will survive. Around 15,000 jobs have been rescued as a result of the examinership process in the last decade.”

Examinership changes sought

ISME believes the examinership process is not suitable for every business, particularly smaller ones, and has called for changes to the regime to facilitate companies of all sizes.

Based on figures from Revenue, ISME says the basic cost for an examinership is €80,000 to €130,000.

“If you’re going to spend €130,000 reorganising the creditors, it’s not going to happen for a business that turns over a couple of million. That excludes the vast majority of SMEs from the scheme,” Neil McDonnell argues.

“We’ve come up with a simpler process which means everyone doesn’t ‘lawyer-up’ at the beginning,” he said.

Mr McDonnell compared the proposed process to the PIP (personal insolvency practitioner) service, which was introduced after the last downturn to assist individuals who can’t finance their loans to come up with arrangements and payment plans with their creditors.

“It would be a single resolution mechanism that’s run by a single professional by agreement. Instead of going into the Circuit or High Court, you’d have an insolvency practitioner who puts a package together and puts it to the creditors,” he explained.

The proposed mechanism would reduce the cost of the process closer to €50,000, it’s estimated.

The suggestion has been met favourably by government. The Company Law Review Group has been asked to prepare a report for the Tánaiste and Minister for Enterprise, Trade and Employment, Leo Varadkar, on a less costly insolvency process for smaller firms and the plan is understood to be making good progress.

Neil Hughes welcomed the suggestion of a streamlined process which could cut down on court involvement in certain circumstances, but he wasn’t expecting such a process to be introduced in the immediate future.

He rejected suggestions that the examinership process wasn’t suitable for smaller businesses.

“It’s rare that we would say a business is too small for examinership,” he said.

“The costs for a bigger examinership can be large, but it can be small for smaller companies. It’s horses for courses.”

Whether a new streamlined regime can get up and running before the anticipated surge in companies seeking assistance emerges is an open question.

Inevitably, for some, it won’t make any difference. The decision to cease trading will already have been made.